An insurance policy on the life of a decedent is NOT included in his estate if the policy

• A. gifted to his spouse 4 years prior to death, and he retained the right to change the beneficiary.
• B. gifted to his spouse 2 years prior to death.
• C. owned by his spouse, and his estate was the beneficiary.
• D. gifted to his spouse 5 years prior to death, and he continued to make premium payments.

Answer: (C)

The key idea is that life insurance proceeds are included in the decedent’s gross estate if the decedent owned the policy or retained any incidents of ownership at death. If ownership and control have been transferred to someone else and the decedent has no rights over the policy, the death benefit typically does not become part of the decedent’s estate.

In this scenario, the policy is owned by the spouse, and the decedent’s estate is named as the beneficiary. Since the decedent no longer owns the policy and has no incidents of ownership at death, the death benefit does not form part of the decedent’s estate. The managed ownership by the spouse without the decedent’s control means the estate isn’t affected by the policy proceeds at death.

Conversely, the other situations involve the decedent retaining control or ownership (such as the right to change beneficiaries or continuing premium payments), which keeps the policy within the realm of the decedent’s ownership and thus leads to inclusion in the estate.